More hawkish than expected, the Fed meeting steered the forex market this week. This year, foreign exchange market trading now expects up to five rates instead of three. The Fed sentiments boosted the American dollar to close the week as the greatest gainer. Sterling pound came in second.
Australian dollar took the bottom spot, followed by New Zealand dollar. Risk aversion weighed on both of them. Canadian dollar was resilient despite being a risky asset, gaining strength on the rally in crude oil.
The Fundamentals in the Foreign Exchange Market Trading
Risky assets depreciated as the market reacted to hawkish monetary policy, politics, coronavirus upsurge, and poor economic data.
Risk Assets Tumbled on Hawkish Fed
On Wednesday, the Fed’s meeting was more hawkish than expected, contributing to risk aversion strategies. Members left rates unchanged but hinted to raise rates starting in March.
In the view of the Fed, it will soon be necessary to revise the federal funds rate range. Chair Powell did not rule out a rate hike of 50bps. He also said that every meeting would be live. Two scenarios emerged from the Fed’s meeting. A less aggressive scenario would cause four hikes this year. And a more aggressive scenario would cause five hikes.
Poor Economic Updates
Economic updates influenced foreign exchange market trading but could not shake off the shadows of the hawkish Fed monetary policies. The G7 nations, including China, posted poor economic updates.
Also, the International Monetary Funds (IMF) downgraded global economic growth for 2022 to 4.4 percent from 5.9 percent. The IMF warned that the skyrocketing inflation and omicron surge hinders the global economy in its quarterly update.
Omicron Renewed Threat
The omicron variant now has a new sub-variant, B2. B2 variant is more contagious than the omicron type. Evidence suggests it is not severe and can be controlled with the current vaccines. B2 is now dominant in Denmark and has spread to nearly half of the US states.
Brent Crude Forecast
Brent crude forecast netted a sixth weekly gain. Geopolitics and supply concerns boosted oil’s demand. Traders feared the Russia/Ukraine crisis could trigger energy supply shortages. Crude oil rallied throughout the week, but a stronger US dollar capped it at $90 per barrel.
The Ukraine Crisis Heightened Risk Aversion
A meeting between Russia, the EU, and Ukraine in the week failed to resolve a crisis with Ukraine. Russia views Ukraine’s entry to Nato as a threat to its security. And unless the US and its allies address this threat, Russia insists it cannot withdraw from the Ukraine border.
Russia wants a legal contract. That Ukraine should not join NATO and NATO withdraws from Eastern Europe. Meanwhile, Russia continues to deploy armies at the Ukraine’sborder despite agreeing to more dialogues.
G7 Economic Review and Fundamental Analysis
Table: g7 currencies performance summary
| Currency pair | 22nd Jan 2022 | 28th Jan 2022 | Average price | Percentage change | Remarks |
| USD | 95.901 | 97.266 | 96.547 | 1.704 | increase |
| GBPUSD | 1.3485 | 1.3404 | 1.3446 | 1.1067 | decline |
| EURUSD | 1.1323 | 1.1143 | 1.1229 | 1.7372 | decline |
| USDCHF | 0.9136 | 0.9307 | 0.9234 | 2.1400 | increase |
| USDJPY | 113.92 | 115.24 | 114.60 | 1.37 | increase |
| USDCAD | 1.2634 | 1.2761 | 1.2685 | 1.4307 | increase |
| AUDUSD | 0.7140 | 0.6986 | 0.7084 | 2.7426 | decline |
| NZDUSD | 0.6698 | 0.6534 | 0.6630 | 2.252 | decline |
US Dollar Trading Analysis
Another week for the greenback in the green. The dollar rallied 1.704 percent to 97.266 after previously gaining 0.49 percent. The US dollar soared higher, boosted by rate hikes estimates and risk aversion. In addition, rising global market volatility boosted its demand.
America’s economic updates had a muted impact on the US dollar trading analysis early in the week. On Wednesday, Jerome Powell hinted at a rate hike starting March and four or five in the year. He further signaled the end of the quantitative easing program in March.
The US posted impressive economic data in the second half of the week. The data supported Jerome’s view that the US economy could withstand rate hikes. Initial weekly jobless claims fell to 260 thousand from 290 thousand.
GDP numbers also impressed. The GDP grew by 6.9 percent in the fourth quarter, having expanded by 2.3 percent in the third quarter. On Friday, inflation and personal spending affected foreign exchange market trading.
While inflation rose to 5.8 percent from 5.7 percent, personal spending reduced by 0.6 percent. The B2 omicron variant has spread to nearly half of the Americas states, increasing the dollar’s demand.
Pound to Dollar News
The British pound depreciated by 1.12 percent against the US dollar. In the week before, the cable had appreciated by 0.64 percent. The sterling depreciated over the week because of the dollar’s robust performance.
Geopolitical tensions between Russia and Ukraine damaged the pound. And closer to home, Prime Minister Boris Johnson’s political uncertainty further weakened the pound’s foreign exchange market trading.
Pound to dollar news shows Britain posted negative economic data, further weakening the cable. Service sector index declined to 53.3 from 53.6 and reduced to 56.9 from 57.9. The declines lowered the overall composite to 53.4 from 53.6.
Because of the negative economic data, analysts questioned England’s Central Bank interest outlook.
Euro Dollar Trading
The Euro weakened against the dollar on the heels of risk aversion and Fed hawkish statements. For the week, the Euro lost 1.74 percent to 1.1143, having lost 0.59 percent in the previous week.
According to Investing.com, the Eurozone’s composite index fell to 52.4 from 53.1, the lowest in 11 months. Despite Germany posting massive growth in the manufacturing sector, the composite index dropped from 57.4 to 60.5.
Eurozone member states had mixed economic GDP updates. Germany’s fourth-quarter GDP contracted by 0.7 percent, while France and Italy registered improved economies.
Geopolitics also weighed on euro dollar trading. Since most of the Eurozone’s oil and gas comes from Russia, the Ukraine crisis hurt the Euro, and a war would severely damage the Eurozone’s economy.
USD CHF Trend Analysis
USD CHF trend analysis shows swiss franc lost 2.1400 percent to trade at 0.9307 against the dollar. The Swiss economic barometer improved to 107.8 from 107.2, versus a 106 projection. Consumer spending, insurance, and financial services pushed up the economic barometer.
The Swiss trade balance decreased from 6.1 billion Swiss francs to 3.69 billion Swiss francs.
Loonie Vs US Dollar
For the week, the loonie depreciated 1.50 percent against the dollar. Previously, it had lost 0.23 percent. Canada had a quiet week on the economic calendar. This left performance of the loonie to the Central Bank of Canada (BoC) monetary statement, risk aversion, and the dollar’s robust performance.
A hawkish Boc uplifted the loonie early in the week before Fed’s sentiments sent it to the reds on Wednesday. Notably, crude oil rally cushioned loonie vs us dollar.
Asia-Pacific Foreign Exchange Market Trading
New Zealand and Australian dollar in deep red, for the second week in a row. The Japanese yen also lost against the king dollar.
Australian To US Dollar News
The Australian dollar tumbled the highest, 2.74 percent, to 0.6988. Previously, it had lost 0.3192 percent. Business confidence and inflation figures drove Australian to US dollar news on the economic front.
Despite a pickup in the inflation rate, the Bank of Australia still maintains a dovish rate. Australia’s fourth-quarter inflation rate edged higher to 3.5 percent from three percent. But the figures were not enough to support the Aussie.
After discouraging production figures, the Aussie dollar started the week on the back foot. The Australian composite production index dropped to 45.3 from 54.9. Tuesday, consumer prices beat expectations and supported the Aussie.
Despite Australia’s top export commodities surging, the Aussie could not match the strength of the soaring US dollar. Hawkish Fed meeting on Wednesday added more pressure on the Aussie dollar.
New Zealand Currency To US Dollar
New Zealand currency also went on a high gear crash. The kiwi dollar fell 2.52 percent to 0.6548 against the US dollar. On the economic front, inflation data uplifted New Zealand currency to US dollar exchange rate.
New Zealand’s fourth-quarter inflation rate beat expectations, jumping to 5.9 percent from 4.9 percent. Economists had projected inflation to increase to 5.7 percent.
Japanese Yen to US Dollar Exchange Rate Forecast
The Japanese yen also fell against the king dollar. For the week, the yen depreciated 1.39 percent to 115.26. In the previous week, it had gained 0.45 percent.
Production and inflation data failed to support the Japanese yen to US dollar exchange rate forecast on the economic front. While the production index tumbled to 46.6 from 52.1, inflationary pressure eased to 0.2 from 0.5 percent.
Conclusion
During the week, Fed’s monetary policy drove foreign exchange market trading and primarily boosted the American dollar’s robust performance. Other factors also contributed to the risk-off trading.
Week Ahead
For the coming week, we expect these fundamentals along with others to drive the forex market;
- Traders expect news from three Banks. Bank of England is likely to increase rates, European Central Bank to make no significant announcements, and Reserve Bank of Australia is unlikely to raise rates.
- Economic updates
- more companies to release their earnings.
- Russia/Ukraine disputes
Stay Tuned!